The ‘dumb pipe’ moment may be here for payments incumbents…
Payments incumbents are in a race to the bottom - years of focusing on pan-regional consolidation and cost leadership has led them to neglect brand and experience differentiation, leaving them to compete on price alone.
Cash isn’t the enemy anymore, alternatives are - the days of growing by winning merchants new-to-card are no longer. The shift from cash to card, accelerated in part by the pandemic outstrips the birth rate of new businesses.
Challengers have different motives and standards - digital challengers are taking aim at both the SMB and Enterprise segments by their need for simple, intuitive and helpful services. Challengers are investing heavily, often without a profit motive.
Interia is a good protection, but won’t last forever - only one in seven merchants eligible to switch are doing so every year, as the perceived financial, functional and emotional barriers to switching mission-critical services hold them to existing providers. But some switching schemes are gaining traction, whilst regulators make noises about increasing competition through new rules on transparency and comparability of tariffs.
As the fintech ecosystem develops, interoperability is becoming key - fintechs from across the SMB landscape - banking, to accounting, to lending - are starting to see Payments as a key opportunity to widen revenue, as the battle to become the primary financial services in a merchant’s life gets tougher.
The pandemic has killed the bifurcation of online and point of sale - it was already starting to happen with challengers crossing the chasm with Stripe to POS and Shopify to online. But the pandemic has reinforced the need for truly omnichannel Payments for SMBs, as journeys like ordering ahead or online menus have broken down the barriers between channels.
… but Payments has the power in the SMB ecosystem
Powered by the tailwinds of consumer behaviour - cash has lost the battle. Consumers have become increasingly cashless and ecommerce continues to claim a greater share of incomes - consumers spend far more on card than they do on cash now.
The most relevant service in a merchant’s life - many merchants see their payment provider as the most key service in their financial services toolkit. It's the pipeline to their income.
The first step in the money flow - merchants go through their payment provider before ‘cashing out’ their funds. Challengers like Shopify and Stripe are heading funds at the pass, to create financial services around unsettled funds.
Here to stay - despite the plays from OEMs, technology giants and crypto currencies, card has become the established infrastructure on which the economy runs. It’ll take decades for this to change.
The threats are real, but so is the opportunity
The risk of new entrants - attracted by the wide commercial potential of Payments and the secular growth it continues to experience - it’s only a matter of time before the Big Tech assault on Payments gathers pace.
The shift from commodity to service - when selling an MSC contract and a terminal, the Payments battle was in distribution to win merchants cheaply. It's now about the right functionality delivered within the right service.
The key battles to get from commodity to invaluable service
Build brands that communicate value - beyond being called to mind when merchants are ready to switch means thinking beyond headline rates to communicate value.
Design experiences that retain merchants and reduce costs - fulfill merchants’ service expectations by designing onboarding and CX to drive tenure and retention through experience.
Develop a product strategy that goes beyonds rates and devices - consider product needs that go beyond payment acceptance such as software integrations, reporting or even financing needs.